Jenkins: None Dare Call It Default

A nicer term for what's about to sock the middle class is 'entitlement reform.'

By

Holman W. Jenkins, Jr.

Updated Nov. 23, 2012 6:11 p.m. ET

To call Greece First World may be a stretch, but Greece has defaulted once already, and it is only a matter of time until Greece defaults again. Welcome to default-o-rama, the next chapter in the First World's struggle for fiscal sustainability.

Japan is piling up debt in the manner of a nation beyond hope. France, Belgium, Spain and Italy are defaults waiting to happen unless Europe can somehow generate the kind of growth that has eluded it for decades.

America's fiscal cliff is an artificial crisis. We have no trouble borrowing in the short term. But at some point the market will demand evidence that long-term balance is being restored. President Obama said in his first post-election press conference that he doesn't want any proposals that "sock it to the middle class." He knows better. A long-term socking is exactly what's coming to the middle class, which must pay for the benefits it consumes.

ENLARGE

Corbis

A few years ago, when the economy was humming, a common estimate held that federal taxes would have to rise 50% immediately to fully fund entitlement programs. Today, a 50% tax increase would be needed just to meet the government's current spending, never mind its future obligations.

One way or another, then, entitlements will be cut. Don't call it default. The correct term is entitlement reform.

You saw this day coming and saved for your own retirement. Don't call it default when Washington inevitably confiscates some of your savings, say, by raising taxes on dividends and capital gains. Taxpayers accept the risk of future tax hikes that may make the decision to save seem foolish in retrospect.

According to economists
Robert Novy-Marx
and
Josh Rauh,
state and local taxes would have to increase by $1,385 per household immediately to make good the pension promises to state and local workers, including firefighters and cops. That's not going to happen given all the other demands on taxpayers. Default, in this case, is the proper word for cities and states using bankruptcy to repudiate their pension obligations.

Prominent voices ask why the Treasury shouldn't just cancel the government bonds the Federal Reserve has been buying. It's money one part of the government owes the other. Dispensed with, of course, would be the idea that the Fed, in buying these bonds in the first place, was engaged in monetary policy. The Fed was printing money so Washington could spend it.

Now let it be said that inflation isn't fundamentally a solution to the entitlement problem, but the Federal Reserve is being led by increments to accommodate inflationary financing of future deficits. Don't call it default. Inflation is a risk savers are deemed to have accepted by putting their faith in the U.S. dollar.

Here's what you weren't told about Medicare during the presidential debates. Under the Paul Ryan plan, the affluent would pay more. Under the Obama plan, the affluent would flee Medicare to escape the waiting lists, shortages and deteriorating quality as Washington economizes by ratcheting down reimbursements to doctors and hospitals. Don't call either default. You don't have a legally enforceable right to the free care you imagined you were promised.

"Don't worry" was President Obama's implicit message during the campaign: If cutting subsidies for Big Bird is unthinkable, a joke, how much more so cutting benefits for middle-class voters?

Don't go running to a judge when this doesn't pan out. The courts do not overrule changes in government policy just because citizens find their promised free lunch isn't forthcoming. Nor will it be fruitful to appeal to politicians' sense of "fairness." Politicians can be relied on to do what will get them re-elected. And, believe it or not, that is the good news.

If politicians weren't eager to be re-elected, the trust necessary to be an investor would vanish altogether. While there is no escaping our challenges, there is a path in which the economy grows strongly and we don't savage each other, and there is the other path. For years the trustees of Social Security and Medicare were accused of exaggerating the programs' deficits by envisioning that America's long-run growth would become more like Europe's. Now who doesn't fret that America's growth is becoming permanently slower like Europe's?

Which brings us to President Obama. He knows cuts are necessary but seeks to position Democrats politically as the defender of all spending. Notice that, with ObamaCare, he is deliberately creating a constituency of the young to set against the old in future fights over the allocation of federal health care dollars.

Meanwhile, saving the dynamism of the U.S. economy, while still affording an entitlement state, naturally falls to the other party in a two-party system.

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